Investing in Kintsugi

In a landmark case related to taxation, on June 21, 2018, the United States Supreme Court ruled in favour of the state in South Dakota v. Wayfair Inc., overruling a longstanding physical presence rule (local nexus) and creating what came to be known as economic nexus which allowed states to require remote sellers to collect and remit sales tax. 

While this led to the widespread & rapid adoption of economic nexus laws by tax-dependent states, for sales taxpayers, it significantly amplified the complexity of an already complicated sales tax regime due to the lack of uniformity in economic nexus thresholds.

To put this in perspective, sales tax collection in the US in 2022 was north of $570B and a failure to comply with sales tax laws can attract penalties ranging from 10-25% of the tax amount depending on the State. That is a $100B problem statement to solve in the US alone & this is where Kintsugi comes in. They are leveraging advancements in AI to build a full-stack sales tax automation platform which can effectively track nexus, accurately predict sales tax liabilities across states, and fully automate the process of sales tax registration, filing & remittance. 

Sales tax compliance in the US can only be solved by automation

Sales tax is a critical source of revenue for state and local governments in the United States, funding essential services and infrastructure. However, the web of sales tax regulations can be intricate, causing confusion and challenges for businesses operating across state lines. The challenges in sales tax compliance are:

Large Volume of rules/regulations

US Sales Tax is levied by US State, County, City and within each city by each jurisdiction. Thus, Sales tax rates vary between streets and are determined by the exact street address. The US has 50 states, 3,100 counties and ~110k cities, each with the authority to levy their own sales tax rate/regulations. For Example: If you purchase an iPhone and have shipping for Zip Code 94305 (Palo Alto) and 94205 (Menlo Park) – you will notice a different tax amount, even though they are just 3 miles apart.

Applicability and dynamicity of tax regulations

The taxability of goods and services also varies across states. E-commerce commissions are taxable in 46 out of 50 states, whereas software sales are taxable in 22 out of 50 states. Some states exempt groceries, and some don’t. Additionally, sales tax laws are always changing. A Senate bill can go in tomorrow, and people could vote, and the law could change, making it impossible for companies to track all the changes. Tracking in a few jurisdictions is fine, but imagine tracking 110k regulations across 10k jurisdictions. Phew!

Tracking local nexus

Businesses must file sales tax returns in every state where they have a physical presence. Post-COVID, with remote working, local nexus also gets established unintentionally in all places where team members work remotely. This increases sales tax compliance even though no business activity/transaction exists.

Tracking economic nexus is very complex

On June 21, 2018, the United States Supreme Court ruled in favour of the state in South Dakota v. Wayfair, Inc., which overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax. This meant if a seller had a physical presence in New York and sold to a consumer in San Francisco (where there is no physical presence of the seller), the seller would still have to collect taxes in both New York and San Francisco and remit to respective governments. With the economic nexus, the complexity increases exponentially – businesses need to track new jurisdictions where they might have sales tax compliance, ensure appropriate tax rates are levied on invoicing in each jurisdiction of the economic nexus and file returns in each of those states.

Cumbersome filing procedure & high cost of non-compliance

Sales tax portals are confusing and outdated. Most don’t have two-factor authentication or single sign-on (SSO). For a business to keep track of all the portals’ credentials, the sales tax deadlines and the changing laws is very cumbersome. The cost of non-compliance is high. 10% of tax due + 1% for each month’s delay, capped at 30% of the tax due.

Kintsugi aims to solve compliance by building a full stack ‘predictive’ sales tax platform

Kintsugi is building a global sales tax compliance tool that enables businesses to automate US sales tax compliance. Kintsugi sits at the origination/source of the transaction (like billing systems):

• verifies each transaction through its real-time database of rules from 110k+ jurisdictions, 
• tracks local nexus / economic nexus on a real-time basis, 
• identifies appropriate tax rates for invoicing and 
• during month-end helps with one-click remittance and filing of sales tax returns in each applicable state.

In addition, Kintsugi has also built an LLM which is trained across all Sales Tax regulations across 110k+ jurisdictions. This acts as a 24/7 support tool for tax professionals and finance teams.

With its 10-minute onboarding, seamless workflows and real-time support via LLM, Kintsugi is already becoming a go-to product for sales tax compliance for companies of all sizes in the US.

We believe this is an exceptional team solving a large global problem at an inflection point

We are proud to partner with Pujun, Barkin and Jeff at Kintsugi as we believe this is an exceptional team in terms of talent, experience & purpose. 

• Pujun brings strong AI/ML experience, having worked on indexing/ranking of Facebook stories and many ML research projects for Google/Meta. He also worked at Stanford AI Labs alongside Andrej Karpathy. Pujun completed his undergrad from Georgia, MS from Stanford and dropped out of the MBA at Harvard. 
• Barkin brings product manager skills and domain knowledge, having built similar products previously at Earnest Research. He also brings a strong finance background, having spent over 5 years at Credit Suisse & Goldman Sachs, and is currently pursuing the CPA program in the US. Barkin is a graduate of Elec & Comp Science from Yale and is an MBA from MIT Sloan.
• Jeff has spent over a decade working in technology, software engineering & data engineering. He brings a wealth of experience as an Engineering Manager at Atlassian and ex Co-founder/CTO at MonetizeNow. Jeff holds a BS in computer science from the University of Montana. 

What we really like about this team is that they strongly complement each other and bring significant talent/experience in all three aspects of tech, product and business development skills. We also believe that their energy is infectious, their vision is grand and their execution capabilities are exceptional. 

We also highlight some of the other areas that really excited us about this opportunity:

Complex & dynamic problem with a large addressable market 

The state-by-state variability, nexus determination, taxability of goods and services, economic nexus laws, filing and reporting requirements, and evolving legislation collectively create a maze that businesses must navigate to ensure compliance. 

We estimate a Serviceable Addressable Market (SAM) of c.$3-5B by 2028E, considering only the US E-commerce & SaaS businesses as ideal customers for Kintsugi. We also believe this is a truly horizontal product as the problem is sector-agnostic & global and has the potential to create a larger outcome.

Demonstrated success in the category & limited competition provide a large opportunity for a new player

There are few players in the category – long-standing tools like Avalara or more recently built tools like Anrok. This allows a new player an opportunity to reimagine sales tax compliance to make it more seamless, predictive and automated.

Avalara – Currently at ~$750M ARR. IPO’ed in 2018, reached a market cap of $19bn and was later acquired by Vista Equity Partners for $8.4 Bn in 2022. This demonstrates that the market opportunity is large.

TaxJar – Acquired by Stripe in Apr 2021. Currently available only for Stripe customers. Had raised $60M at $180M valuation from Insight Partners. They were at a scale of $40M approx during the fundraise.

Anrok – Raised $20M from Sequoia. Close competitor. Focused on SaaS. Need for new players to incorporate the new dynamism of economic nexus and other shortcomings of existing tools

Strong execution focus and high-quality early traction

In under 6 months, the founders have achieved strong outcomes: they have single-handedly built a robust, soon-to-be SOC2-compliant, product and have set in motion key GTM strategies/partnerships like marketplace listing, tax consultant partnerships, direct outreach and state partnerships.

In a short span of time, they have gained 25 paying customers, including a large enterprise client and have built a very strong sales pipeline driven largely by strong inbounds. 

If you are also dealing with the complexities of sales tax and are keen to simplify sales tax compliance so that you can focus on building & growing, try out Kintsugi or reach out to pujun@trykintsugi.com to learn more!

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